September 23, 2011

Tricksie, Or, The Argument Warren Buffett Did Not Make

With taxes on the wealthy on the political radar, we’re going to drowning in a vast wave of double-talk and smothered by vast amounts of fuzzy math. Still, one has to try. So, a couple of notes.

One is that you have to beware of the old trick of saying “taxes”, then slipping into “income taxes”. Most Americans pay more payroll than income taxes, but the reverse is true at high incomes. So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do.

Well, the question of how to think about Social Security and Medicare is vexatious. In other venues, and for decades, advocates of Social Security have promoted it as an "earned benefit". Here, for example, is Bernie Sanders writing last week in favor of higher Social Security taxes:

It is the one earned benefit program upon which they [older Americans] can depend. They know that they have paid into Social Security and they have earned the benefits due them by our government.

Well, fine. If it is an earned benefit then we can mimic the activity of the Social Security actuaries and track a person's dollars in with the eventual dollars taken out. And the upshot? Social Security tends to be somewhat re-distributive, favoring lower lifetime earners over hgher ones. Krugman himself made this point when it helped him bash Bush:

...the formula determining Social Security benefits is progressive: it provides more benefits, as a percentage of earnings, to low-income workers than to high-income workers.

And Medicare is clearly tilted towards lower earners, since everyone gets the same benefit regardless of their contribution.

So - in assessing the tax burden faced by Americans one might reasonably ignore both Social Security taxes and benefits, figuring that on net, the program favors lower earners.

But that would be tricksie! Becasue when the burden of taxes is the topic, Krugman et al prefer to pretend that Social Security is just one more "pay as you go" government program. In this formulation Social Security's current costs and eventual benefits have no more link than the connection between a person's income taxes paid and their benefit from the national defense budget.

Hmm. As a political calculation, the marketing appeal of the "earned benefit" approach is obvious. Still, I am not sure why progressives think we should be taxing working class laborers so that well-off retirees can cavort in Miami. Just why are Social Security benefits higher for formerly high-earning retirees with ample retirement savings? Surely Social Security and Medicare should be means-tested if they are just "pay-go" transfer schemes intended to lift the elderly out of poverty? I don't notice Warren Buffett clamoring to have his Social Security benefit knocked down to zero and his Medicare beneift suspended, but that would be a logical policy for him to advocate if he wanted to save Social Security. (Soc Sec benefits are taxable, but that puts the receipts in the general fund; means-testing the beneift would keep the money in the Soc Sec Administration budget.)

If Democrats want to step forward in favor of means-testing the Social Security benefit then I will take them seriously that it is a pay-go scheme. If they want to hide behind the "earned benefit" marketing pitch, then they should man up and drop it from their tax burden calculations.

SOMEBODY CALL 9-9-9: Since you asked, I would be fine with scrapping the (regressive) payroll tax and replacing it with a (regressive) national sales tax, or VAT, or some such tax on consumption rather than work. But Roosevelt's acolytes on the left will never agree.

Comments

"In economics, a defined benefit pension plan is a major type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending on investment returns. It is 'defined' in the sense that the formula for computing the employer's contribution is known in advance."

Because the Social Security so-called Trust Fund is funded with unmarketable bonds, I think it really is better to classify Social Security exactions as taxes and include the receipts in tax distribution burden charts. In addition, Social Security should be recognized as the welfare for elders program as it is. Then we could discuss in a reasonable intelligent manner how such a welfare program should be financed. I can't blame the GOP for hoisting the Dems on their own petard by excluding Social Security exactions from tax distribution charts. However, in discussing the economic of funding welfare programs for the elderly, middle aged, young adult, teen and child sectors, it is preferable to face what things really are.

They know that they have paid into Social Security and they have earned the benefits due them by our government.

I guess Bernie Sanders never heard of Flemming vs. Nestor:

In this 1960 Supreme Court decision Nestor's denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor's benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right.

Ignatz and DOT, I don't think it's even a defined benefit plan. If a trustee of a defined benefit plan funded the plan with its unmarketable bonds, said trustee would be chased by various federal and state authorities and put in the slammer. I would call it a welfare plan measured provisionally by one's work history, but subject to forfeiture.

DLN - You are, of course, referring to the regular basement folk who gather, socialize and comment on Just One Minute. Mr. Maguire allows those errors to draw out rigid, pissant and picayune pedants who fall for the trap every time. Are you another uptight virgo? Get help and stay on topic!

--Ignatz and DOT, I don't think it's even a defined benefit plan. If a trustee of a defined benefit plan funded the plan with its unmarketable bonds, said trustee would be chased by various federal and state authorities and put in the slammer. I would call it a welfare plan measured provisionally by one's work history, but subject to forfeiture.--

It was conceived as a defined benefit plan and it still features benefits which are defined based on what a person has contributed.
But you are correct that it is close to becoming a welfare plan and would fully be one were SS taxes uncapped and benefits means tested.
Medicare is even closer to being a welfare plan since it's "contributions" have been uncapped for years.

I don't think it's even a defined benefit plan. If a trustee of a defined benefit plan funded the plan with its unmarketable bonds, said trustee would be chased by various federal and state authorities and put in the slammer.

A recurring dream I have is that ERISA is applied to Social Security and state pension systems, and PACOB regulates the investments of government officials charges with regulation or legislation.

--"It is 'defined' in the sense that the formula for computing the employer's contribution is known in advance."--

Yes but the benefit is defined in relation to that contribution regardless of what is actually available at retirement or the ROR on what was contributed, which means it is a defined benefit plan, no?

If it were a defined contribution plan the "formula for computing the employer's [sic] contribution" would also be known but his level of benefit would not be guaranteed and would be wholly dependent on the ROR over the period of the plan and the available funds at the end of it.

It amazes me when liberals advocate raising the cap on payroll-taxable earnings. That's a 12.4% increase in the tax rate on that income, in a very fat part of the income distribution. That strikes me as politically catastrophic for SS, which owes its survival and popularity to the fact that it's not designed to redistribute income.

"Mr. Maguire allows those errors to draw out rigid, pissant and picayune pedants who fall for the trap every time. Are you another uptight virgo? Get help and stay on topic!"

Yes, indeed. Clever of you to figure that out, frau.

I can tell you that if there were a VAT, there would still be disparate outcomes. If you took most of my money and gave it to people at the bottom to even things out, there would shortly again be a disparate outcome,

Genetic advantages; habits of mind; thrift and different skill levels account for much of that, and, of course, dumb luck which has kept Krugman from his true calling as a wal- mart bagger with a gift of gab.

If there is a VAT, there will be both a VAT and an income tax, no matter what the politicians say. Plus, the VAT will be extremely complex. What we need is no VAT and modest income tax simplification (I say "modest" because although a Huntsman or Steve Forbes type plan would be preferable, there is no way in Dante's Circles such a broad based reform would be accomplished).

Clarice, don't sic Krugman on me when I go to Wal-Mart. I can just imagine Krugman screwing up enetring the prices in the cash register. As a bagger, Krugman would probably put the cans and bottles on top of the eggs. Although Krugman does damage as a NY Times op edder, he does less than if he were a Wal-Mart or grocery store clerk!

I see no material difference between "earned benefit" as used in this dicussion, and "defined benefit."

No, I think Ben has it right. An earned benefit plan, like a 401(k), can only return what it has earned. Defined benefit pensions instead promise a particular return, eg, 80% to your highest year's wages.

Social Security defines what is to be paid, and so acts as a defined benefit plan.

this gem from Krauthammer's latest, "Radical Returns To Resume The Transformation"

((Obama's Democratic base is electrified. On the left, the new message is playing to rave reviews. It has rekindled the enthusiasm of his core constituency — the MoveOn, Hollywood liberal, Upper West Side precincts best described years ago by John Updike:

"Like most of her neighborhood, she was a fighting liberal, fighting to have her money taken from her." ))

As Appalled's above post indicates, it is not a "plan" in the way benefits lawyers and benefits financial specialists think of retirement plans. There are no assets in trust from which the benefits are paid (an unmarketable IOU from the administrator in substance is not a trust asset. The payment of benefits depends on the receipt by the Feds of future tax revenues and the future Federal borrowing power.

One can measure the benefits any way one wants (earnings plus actuarial and inflation factor, years of service, average earnings during specified years of service, a set amount for each day LiLo is in rehab), and one can call it whatever one wants, but if the trust is funded with unmarketable assets, it is not a retirement plan in any meaningful sense (especially when the benefit secured by a "trust" with unmarketable assets is subject to forfeiture).

Interesting you brought up VAT. Yesterday, I happened to catch a little of the Super Committee hearing in which the Chief of Staff of the Joint Committee on Taxation (Barthold?) was testifying. [Full disclosure: as soon as John "F**king" Kerry started to pontificate I turn to Cartoon Network for Sponge Bob].

An interesting point was made about Corporate taxes in America being 2nd highest in the world, in that over in Europe and other OECD countries with lower corporate taxes, by and large they also have significant VAT. I know that it is 20% in the UK (refundable to non-citizens traveling through via Customs rebate) and it is 21% in Belgium. Nordic countries are much higher. But the point seemed to be that they are thinking along the lines of lowering corporate tax rates but adding a national VAT thinking it will repatriate corporate foreign earnings back to the States for capital infusion.

We do not want a VAT of any kind at the national level or even state level in this country.

mentioned VAT only because it is mentioned in TM's post.It's exceedingly regressive and provides improvident pols with an easy way to keep the peons from knowing what they are actually paying to keep the ship of state at sea.

--No, I think Ben has it right. An earned benefit plan, like a 401(k), can only return what it has earned.--

Very clearly that is not what Bernie Sanders means when he says;

It is the one earned benefit program upon which they [older Americans] can depend. They know that they have paid into Social Security and they have earned the benefits due them by our government.

He is equating SS which clearly most closely represents a defined benefit plan with an "earned benefit" plan.
He doesn't mean you can only collect what your account has earned but that by paying anything into it you've 'earned' whatever benefits you get even if they're twice [or half] what you supposedly accrued.

If you divide all pension plans into two classes--defined benefit or defined contribution--there is no question that SS is a defined benefit plan (it couldn't possibly be called a defined contribution plan).

It is my understanding that the Bernie Sanders language ("earned benefi") is intended to describe SS as it is today--i.e., pretty much a defined benefit plan--in terms that are pleasing to the ear and mask any redistributive effects. I know of no basis for suggesting that it is more like a defined contribution than a defined benefit plan, which is the assertion I took exception to.

“The last 40 years have seen a gigantic expansion of political power over economic affairs by the federal government. This change is linked by many scholars to the passage of the income tax law in 1913.”

Imagine what he'd say if he were alive today.

In 1962 he wrote:

“[T]he bitter truth is this: that for 30 years we have been marched towards collectivism despite occasional repulses by conservative forces.” He didn’t spare his own party from criticism. “Since the ’thirties the Republican Party has had no coherent or recognizable political faith,” he wrote. “When out of power it has occasionally brilliantly resisted the collectivist drive. But mostly it has collaborated with the Democrats in diminishing individual freedom, calling such action bi-partisan.”

I know we accept it as a done deal, but I think the Founders would shudder at the idea that the federal government has the right to know what individuals earn, never mind take whatever they want of it.

Christie suggested to an audience at New Jersey's Rider University that the current GOP candidates are not answering the public's appetite for real leadership.

"I think what the country is thirsting for, more than anything else right now, is someone of stature and credibility to tell them that and say, 'Here's where I want us to go to deal with this crisis,'" Christie said.

Christie continued: "The fact that nobody yet who's running for president, in my view, has done that effectively is why you continue to hear people ask Daniels if he'll reconsider and ask me if I'll reconsider."

Let's hope not. The last thing we need is a muslim placating, gun control promoting, catastrophic global warming believing fiscal conservative to tidy up the left's accounting and endorse the rest of their insane agenda.

"A majority of Americans rates President Obama 'about the same' or 'worse' than his predecessor, George W. Bush, according to a new Gallup poll. When a random sample of 1004 adults were asked to compare the 43rd and 44th presidents, 34 percent of respondents said Obama had been a worse president than Bush, while 22 percent said he was about the same. "

What if Christie were to run on a Scott Walker platform to defang the federal public sector unions? If he did that, I'd forgive a number of his other positions, which wouldn't ever make it through a Republican Congress.

Ignatz, I have never encountered the term "earned benefit", but I think Appalled does a lot more benefits work than I do; so, Appalled, if you are checking in, have you ever heard of "earned benefit" as a term used in the context of pension plans?

Matt linked 2 nights back to a story that people in Belgium are refusing to work a 40 hour work week. 37 hours or so is all they can handle, so if the country collapses around them, big deal---they don't care and can't be bothered.

I meant to mention this as it relates to Euro work ethics.

Last month a company I am familiar with had a situation where ground workers in their Paris Hub, (not company employees, but workers required by Country/Union Laws to be the ones hired for these particular ramp duties) decided to go on strike. As a result the company (did I mention I'm familiar with it:) decided to immediately move their sort work to a new Hub facility that is just getting started in Cologne, Germany.

Extra workers were immediately flown over from the States to augment the small German workforce, and amazingly, because of the efforts of everyone and that great German work ethic, the new hub worked beautifully and surprised everyone (especially higher management folks) with how much work they were able to accomplish at a moments notice. All schedules were met beautifully.

4 days later, the head of the striking Paris bunch, observing how the German location was humming like clockwork and making the Paris guys jobs obsolete, called off the Strike and immediately conceded to the company's demands that they immediately get back to work. They did.

Was able to hear some big muckety mucks discuss this episode last week. They were vocally very pleased to discover how easy it was to mothball the Paris operation and immediately provide excellent uninterrupted service from their new location. My perception was that this group of employees in Paris pretty much just completely chopped their own legs out from underneath themselves, and that's fine by me as I like German Beer better than French wine any day of the week.

Don't get me wrong, if the schools and government in Texas want to subsidize illegal alien tuition, I have NO problem with a 5% cut on all Texas government employyes and Texas education salaries to pay the bill. Think the professors will take a 5% cut to not be called Nazi's!

Governor Perry, if Africa began flying 20 plane loads of illegal immigrants into Texas airports each day, would you oppose 'fencing' those people out, or would you insist the borders be closed in our airports??

In short, would you have a different policy for thousands of African illegal aliens then you have for Hispanic illegal aliens?

When Perry wins a close Presidential Election of 2012 with electoral votes in close tallies in southwestern states, I predict all (or almost all) will be forgive.

I plead with my friends here: give the guy some slack. Let's make a determination as to whether he really is serious about getting the entitlements under control. If we conclude that he is, having a POTUS who is truly serious about addressing the entitlement state is more important than a POTUS who has supported fencing and opposed tuition for illegals.

Let's not let perfection be the enemy of a substantial improvement over the current regime.

By the way, I say this as one who has concluded that Palin would be a better POTUS than Perry (or Romney or anyone else running, for that matter).

I don't think Perry has a chance. I say that because the flaws that I have seen in his knowlege and ability to think in three debate performances are huge and, in my mind, incurable. If he rights the ship, fine, but my sense is that it can't be righted.

Personally, I think Perry is more electable (hate that word?) than Palin who has been permanently damaged to the muddle. George Bush had some pretty lame ideas about immigration too. Would you rather have had Bush than Obama?

Centralcal, I suspect that Massachusetts, as well as California, will end up in Obama's column. My suspicion also is we will all be glued to our sets watching the Arizona and New Mexico results. I hope I am wrong and those predicting that Obama is going to get a thumping are correct.

DOT, it's tough for me to argue against your position. However, seeing Romney in Massachusetts and seeing that many of the Romney folks were involved in the 2010 campaign for Deval Patrick's opponent, I can't help but concluding that I'd rather see Perry, who has done OK in Texas politics, than Romney deal with what I think is going to be a smoothly functioning thug machine for Obama.

Not to mention that I think that Perry will go over better with Hispanic Catholics, who I think will be a key to the election, than Romney. I think Perry will win more electoral votes with what I think will be his appeal to Hispanic Catholics than he will lose electoral votes by turning off certain white collar suburban therapy state types.

Remember that in September of 1979, Reagan wasn't the guy we now remember as Reagan. He was viewed by a significant part of the GOP as the guy who cost Ford the 1976 election, as a guy who was too old and whose time had passed, and as a guy who would cause the GOP to become too out of the mainstream if he happened to win the nomination. After the Iowa caucuses, he was the guy whose campaign was in disarray. Before the debate against Carter, a lot of folks thought he would be shown up as an airhead.

I just watched the clip of Perry's supposedly horrible, incoherent, stumbling, "did he have a stroke?" attack on Romney and didn't think it was that bad. Does the country really need a politician who can talk smoothly for several minutes straight and not say anything? I'd welcome more substance but I don't care if it isn't delivered slickly.

Wait a minute, centralcal, I think I may have misinterpreted you again. Are you saying that Perry has no chance in either the California primary against Romney or in the California general election race against Obama?

Can Perry win either Iowa or New Hampshire before the SC primary. Isn't that the Giuliani gambit? You cannot come into SC without a win. If Florida moves up, regardless of the penalties, and you win here, you are in the driver's seat. To bad Ohio doesn't have an early primary since that would really settle it.

I agree narc; I think part of the problem is this insanely long campaign season and all the attention paid to these dumbass debates when the deadline to enter the race is still in the future. I know I'm in the tank for Palin but I think her giving these dog and pony shows a wide berth works for me as a protest against everything I find sickening about the whole spectacle. And ace being an idiot.

TC: Right now I am not saying anyone has the California Republican primary vote locked up. What I was trying to say is that, no matter who our candidate turns out to be, California comes too late to decide it for the PRIMARY. We are pretty much stuck with the early state voting.

The Presidential vote (and electoral college) are not part of my comment.

I didn't watch the debates last night, but have seen and read many of the recaps. From this evidence, it seems to me that Perry has not taken these debates seriously so far. He has exhibited lack of commitment, lack of preparation, lack of interest and lack of concentration. These are bad qualities for a debater. More importantly, they are worse qualities for a president, whatever his political philosophies.

He can get his act together, but he is going to to have to buckle down and really work at it.

Whatever you might say about Reagan or Bush, both of them worked at their craft and exhibited resolve and commitment while campaigning and governing.

(a) Buffett, for all his professed desire to be taxed more heavily, is in a long-running battle with the IRS to avoid paying what it says he already owes. Today I saw the disputed amount described as a cool Billion, but I don't know; and

(b) the GOP has begun to call on him to release his tax returns, which he clearly seems to have made an appropriate object of public scrutiny.

I don't think Perry puts much stock in smooth talk or small talk, and he's impatient with the political circus atmosphere of debates. He's fed up with political corruption in Washington, including the establishment Republicans and their inability to forcefully confront, outwit, and bulldoze the Democrats and Obama into the ash heap of history. Naturally, his book 'Fed Up' reflects his anger and frustration at the corrupt status quo, and what urgently needs to be done to reclaim our country.

I agree...he really needs to buckle down. And he needs to exhibit verbally more of what he outlined in his book. It's all about taking back our freedom and liberty and passing that determination and enthusiasm on to the voters.

I'm in line at the customer service counter at the local Walmart listing to a well-dressed lady harangue the poor clerk. Seems she got a $50 Walmart gift card from a friend, but sniffs that since she doesn't shop at Walmart it is worthless to her, and she wants the cash. The clerk can't do that.

I offer her $40 for the card. She declines, no, she'll only accept $50. I point out that the card isn't so worthless to her, and remind her to thank her good friend.

Reading that stupid witch Nooner's latest love poem to Mandingo Jesus and then flipping quickly to the article on the Israel/Pali dustup at the UN makes you wonder if she's not on acid. How anybody in their right mind can praise El JEFe's stumbling excuse for moral equivalency compared to Netanyahu's clear statement of what has in fact happened marks somebody who just composed pretty words for Reagan to read while not understanding a thing about what they were in support of.

He can get his act together, but he is going to to have to buckle down and really work at it.

At all three debates he's been in, Perry has noticably wilted in the last half, mentally and physically. Someone mentioned his back surgery/meds as a possible reason. If so, buckling down and working may not be possible. And his handlers' "debates aren't important" schtick isn't gonna fly. Obama is going to bring down over $1 billion worth of negative advertising hell on our nominee, who better be ready and able to defend himself nonstop. Perry seems congenitally unable to do that.

I think a lot of people put their eggs in Perry's basket right away and that's why there is so much surprise and dismay at his debate performance.

Not sure what it all means, but whatever weaknesses Perry has, I'd like them to be brought to light sooner rather than later. That goes for his medical condition if it is serious enough to affect a debate performance. We can't afford post-nomination surprises.

If so, that's not necessarily a bad thing -- although it's not going to help him in the eyes of the public.

At this stage in the game I'd prefer that a candidate take every opportunity to demonstrate that they understand and share GOP voter concerns. Perry hasn't given the country all that much to go on so far; I don't think he can afford to appear as if he's blowing anything off.

I assume Krugman isn't completely innumerate, which makes this bit of blithering more than slightly offensive:

So focusing only on income taxes makes it seem as if the rich pay much more of the burden than they really do.

The reason we focus on income tax at higher levels is because the relatively modest payroll tax portion becomes increasingly irrelevant. And in any event, as noted above, that tax is progressive as well . . . just not as much.

That recently-quoted statistic makes the case fairly well. Those making the top 50% of the income pay 70% of the taxes. The corollary is that those making the bottom 50% pay merely 30%. Hence the top 10% of taxpayers (representing the top 50% of income) are paying at more than twice the rate as the remaining average. Pretending that isn't so is an exercise in the same "fuzzy math" Krugman pretends to deride.

If he wants to make the case that the rich should pay more than twice as much as the rest of us, fine. Make the case. But the ongoing attempt to pretend they don't pay at a higher rate (on average) is easily disprovable propaganda. And the only plausible reason for that is an effort to justify liberals' class warfare that can only end in further political dysfunction.